CHAPTER 9 - SHAREHOLDERS’ EQUITY

MULTIPLE CHOICE – THEORY

1. B 2. D 3. D 4. B 5. B 6. A

PROBLEMS

Problem 1

Audit Adjusting Entries:

Retained Earnings (950 – 90) – 50,000 35,500

Ordinary Shares 50,000
Ordinary Share Dividend Distributable 47,500
Paid in Capital in Excess of Stated Value 38,000
9,500 x 10% = 950

Retained Earnings (Income Tax Expense) 240,000

Income Tax Payable 240,000

Problem 2

Total income since incorporation P630,000

Cash dividends paid ( 195,000)
Total value of bonus issue distributed ( 45,000)
Correct balance of retained earnings P 390,000

Problem 3

Balance, January 1 P1,590,000

Profit for the year 860,000
Dividends ( 750,000)
Retained Earnings, December 31 P1,700,000

Appropriated for Plant Expansion P 150,000

Unappropriated 1,550,000
Total Retained Earnings P 1,700,000
Chapter 9 – Shareholders’ Equity

Problem 4

Paid in Capital
Preference Share, P100 par, 10,000 shares authorized,
4,000 shares issued P400,000
Ordinary Share, P50 par, 15,000 shares authorized,
8,000 shares issued, 7,700 shares outstanding 400,000
Additional paid in capital 117,700
Total Paid in Capital P917,700
Retained Earnings
Appropriated
For Treasury Shares P19,800
For Fixed Asset Replacement 75,000
Unappropriated 160,400 235,400
Total P1,153,100
Less: Treasury Shares, at cost (300 shares) 19,800
Total Shareholders’ Equity P 1,133,300

Additional paid in capital:

7,000 x P7 P49,000
1,000 x 12 12,000
4,000 x 13 52,000
Reissue of treasury shares – preference 4,700
Total additional paid in capital P117,700

Retained earnings:
Accumulated profit P610,000
Cash dividends paid ( 312,600)
Bonus issue ( 1,000 x 62) ( 62,000)
Total Retained Earnings P235,400

Problem 5

Preference Share Ordinary Share Retained Treasury Shares

Date Shares Amount Shares Amount APIC Earnings Shares Amount
1/1/12 15,000 300,000 4,160,000 1,100,000 4,000 150,000
1/15/12 800 40,000 4,000
2/1/12 1,500 30,000 33,000
3/15/12 (18,750)
4/15/12 200 8,600
4/30/12 10,000 200,000 200,000
5/1/12 2,230 44,600 78,050 (122,650)
5/31/12 41,100 (43,220) (2,150) (81,450)
9/15/12 ( 39,995)
12/31/12 500,000
12/31/12
balances 800 40,000 28,730 574,600 4,516,150 1,415,380 2,050 77,150
Chapter 9 – Shareholders’ Equity

Supporting Computations and Entries

March 15 dividends (16,500 – 4,000) x 1.50 = P18,750

Apr. 30 entry

Share Options Outstanding (APIC 10,000 x 6) 60,000

Cash (10,000 x 40) 400,000
Ordinary Share (10,000 x 20) 200,000
Share Premium – Ordinary 260,000
Net increase in APIC = 260,000 – 60,000 = 200,000

May 1 bonus issue:

Ordinary shares issued 26,500
Treasury ( 4,200)
Outstanding shares 22,300

Charge to Retained Earnings 2,230 x P55= P122,650

Par value of bonus issue 2,230 x 20 = ( 44,600)
Credit to additional paid in capital P 78,050

May 31 Sale of Treasury Shares

Selling price 2,150 shares x P57 P122,550
Cost of treasury shares sold:
150 @ P43 P6,450
2,000 shares 75,000 81,450
Additional paid in capital from this sale P 41,100

September 15 dividends:
On ordinary share : (28,730 - 2,050) x P1.50 = P40,020
On preference share: 8% x 40,000 = 3,200
Total P43,220

Problem 6

Entries for the quasi-reorganization:

Retained Earnings 180,000

Inventory (215,000 – 190,000) 25,000
Property, Plant and Equipment (875,000 – 720,000) 155,000

Cash 600,000
Additional Paid in Capital 600,000

Ordinary Share Capital, P25 par 2,500,000

Ordinary Share Capital, P15 par 1,500,000
Additional Paid in Capital 1,000,000
Chapter 9 – Shareholders’ Equity

Additional Paid in Capital 930,000

Retained Earnings (750,000 + 180,000) 930,000

Shareholders’ Equity

Ordinary Share Capital, P15 par, 100,000 shares P1,500,000

Additional Paid in Capital (1,750,000 + 600,000 + 1,000,000
- 930,000) 2,420,000
Total Shareholders’ Equity P3,920,000

Problem 7

LTC Company
Statement of Comprehensive Income
For the Years Ended December 31, 2012 and 2011

2012 2011
Sales P3,000,000 P2,540,000
Cost of goods sold 1,420,000 1,150,000
Gross profit P1,580,000 P1,390,000
Selling expenses (350,000) (210,000)
General and administrative expenses (260,000) (220,000)
Profit before income tax P 970,000 960,000
Income tax expense 291,000 336,500
Profit P 679,000 P 623,500

2011 Cost of Goods Sold – weighted average

Cost of goods sold under FIFO P1,140,000
Difference in beginning inventory 30,000
Difference in ending inventory ( 20,000)
Cost of goods sold as restated P 1,150,000

2011 income tax expense

Before restatement P 339,500
Adjustment due to change in inventory costing procedure
(1,150,000 – 1,140,000) x 30% ( 3,000)
2011 income tax expense as restated P 336,500
Chapter 9 – Shareholders’ Equity

LTC Company
Statement of Changes in Equity
For the Years Ended December 31, 2010 and 2009

Ordinary Share Retained Total

Earnings
Balances, January 1, 2011 P 1,000,000 P600,000 P1,600,000
Cumulative effect of changing from FIFO
costing to weighted average, net of
applicable income tax of P9,000
(30,000 x 70%) 21,000 21,000
Dividends (400,000) (400,000)
Profit for the year 623,500 623,500
Balance, December 31, 2011 P1,000,000 P 844,500 P
1,844,500
Profit for the year 2012 679,000 679,000
Balances, December 31, 2012 P1,000,000 P1,523,500 P2,523,500

Problem 8

Reported profit P120,000

Loss from fire ( 2,625)
Write off of goodwill ( 26,250)
Loss on sale of equipment ( 24,150)
Gain on early retirement of bonds 7,525
Gain on insurance policy settlement 5,250
Corrected profit P 79,750

Retained Earnings, January 1 P263,200

Stock dividends ( 70,000)
Loss on retirement of preference shares ( 35,000)
Officers’ compensation in prior period ( 162,750)
Other correction of errors 25,025
Corrected profit (see above) 79,750
Corrected retained earnings, Dec. 31 P100,225
Chapter 9 – Shareholders’ Equity

MULTIPLE CHOICE - PROBLEMS

Items 1 through 5

1. B Balance, December 31, 2011 P 750,000

Mar. 31 4,500 x 3 13,500
June 30 ( 250,000 + 4,500 – 6,000) / 10 = 24,850 shares
24,850 shares x P3 74,550
Sept. 30 P2,000,000/P1,000 x 2 shares = 4,000 shares
4,000 shares x P3 12,000
Balance, Dec. 31 P 850,050

2. C RE, January 1, 2012 P 480,000

Profit 600,000
Understatement in depreciation 40,000 x 65% ( 26,000)
Balance, December 31, 2012 P 1,054,000

3. B Issue price P2,000,000

Attributable to the debt
PV of face = P2,000,000 x 0.32197 = P 643,940
PV of interest = P200,000 x 5.65022 1,130,044 1,773,984
Amount credited to equity P 226,016

4. B Interest expense for 2012 = 1,773,984 x 12% x 9/12 = P 159,659

5. C Effective interest for 2012 P159,659

Nominal interest 200,000 x 9/12 150,000
Amortization P 9,659
Carrying value, April 1 1,773,984
Carrying value, Dec. 31 P1,783,645

6. A Correct balance of Retained Earnings

485,000 – 200,000 + 324,000 – 300,000 + 451,000 = P760,000

7. C Additional paid in capital

150,000 + 100,000 = P 250,000

8. D Ordinary share P2,000,000

Additional paid in capital 250,000
Retained earnings 760,000
Revaluation surplus (appraisal increase) 300,000
Total shareholders’ equity P3,310,000

9. A Preference share = P6,000,000 – (4,000 x P200) = P5,200,000

10. C Ordinary share = 200,000 shares x P25 par = P5,000,000

Chapter 9 – Shareholders’ Equity

11. B APIC, January 1, 2012 P3,300,000

Cancelled upon retirement of preference
P1,800,000 / 30,000 x 4,000 ( 240,000)
From sale of treasury shares 6,000 x (45 – 37.50) 45,000
Sale of donated shares 2,000 x 48 96,000
APIC, December 31, 2012 P3,201,000

12. C Ordinary shares outstanding

Issued = 100,000 x 2 200,000

Treasury (8,000 x 2) – 6,000 + 4,000 – 2,000 = 12,000
Outstanding 188,000

13. C Retained Earnings

January 1, 2012 P2,200,000

Excess of retirement price over issue price
280 – (200 + 60 share premium per share) x 4,000 ( 80,000)
Profit 1,850,000
Balance, December 31, 2012 P3,970,000

14. There is no number 14 (Sorry)

15. D Ordinary shares issued:

January 1, 2012 90,000

Mar. 6 – 20 1,400
Nov. 3 55 x 10 shares 550
Total shares issued 91,950
Par value per share P 2
December 31, 2012 balance P183,900

16. D Share premium

January 1, 2012 balance P1,820,00

Mar. 6 1,400 x 42 58,800
Nov. 3 (see entry below) 24,200
Dec. 31 balance P1,903,000

Issue price of bonds 90,000 x 103% P 92,700

Issue price of debt 90,000 x 97% = 87,300
Value assigned to 90 share warrants P 5,400

Entry upon exercise of 55 warrants

Share warrants issued (5,400 x 55/90) 3,300

Cash 550 x 40 22,000
Ordinary share (550 x 2) 1,100
Share premium 24,200
Chapter 9 – Shareholders’ Equity

17. D Paid in capital from treasury shares

Sales price 650 x P40 P 26,000

Cost = P72,600/1,210 x 650 39,000
Deduction from previous APIC from treasury shares P 13,000
Previous balance of APIC 22,500
APIC from Treasury shares P 9,500

18. C Ordinary Share Warrants Outstanding

Issue Price of bonds and warrants P90,000 x 103% P92,700

Fair value of bonds ex-warrants 87,300
Value initially assigned to warrants P 5,400
Value of warrants exercised (5,400 x 55/90) ( 3,300)
Value of remaining warrants P 2,100

19. A Cost of remaining treasury shares

Cost of 1,210 treasury shares originally held P 72,600

Cost of treasury shares sold ( 72,600 x 650 / 1,210) ( 39,000)
Cost of remaining treasury shares P 33,600

20 – 28 See worksheet

20. D
21. D
22. B
23. C
24. A
25. B
26. C
27. A
28. D
Chapter 9 – Shareholders’ Equity

Preference Share Ordinary Share Retained Treasury Shares

Date Shares Amount Shares Amount APIC Earnings Shares Amount
1/1/12 9,000 P900,000 600,000 P600,000 P1,200,000 P3,198,000
1/6/12 22,500 22,500 348,750
1/31 40,500
2/22 7,500 P180,000
2/28 21,000 21,000 525,000
4/30 – (920,000)
5/31
8/31 (12,000) (3,000) (72,000)
9/14 450 450 (1,350)
5,400
11/30 (1,278,900)
12/15 ( 54,000)
12/31 (42,000)
12/31 1,800,000
12/31 9,000 P900,000 643,950 P643,950 P2,118,300 P2,691,100 4,500 P108,000
bal.

January 31:
Value assigned to warrants 1,350,000 x (98% - 95%) = P40,500 (classified as APIC)
Entry on Sept. 14

Cash (450 x 10) 4,500

Share Warrants Outstanding (APIC) 1,350
Ordinary Share 450
Share Premium – Ordinary Share 5,400

SUMMATIVE EXERCISE – CONQUEST MOTORS CORPORATION

Operating Expenses 2,200

Petty Cash Fund 2,200

Materials Inventory 9,000

Materials Acquisition Fund 9,000

Cash 12,000
Salaries Payable 12,000

Goods in Process Inventory 900

Cash 900

Operating Expenses 1,000

Cash 1,000

Notes Payable 300,000

Interest Expense 18,000
Chapter 9 – Shareholders’ Equity

Cash 318,000

Other Financial Assets 350,000

Cash 350,000

Other Income (Dividend Revenue) 6,600

Trading Securities 6,600

Dividend Receivable 2,000

Other Income 2,000

Trading Securities 12,800

Unrealized Gain on Trading Securities 12,800

Installment Sales 610,000

Cost of Installment Sales 396,500
Deferred Gross Profit 213,500

Deferred Gross Profit 108,500

Realized Gross Profit 108,500

Repossessed Inventory (Finished Goods Inventory) 70,000

Deferred Gross Profit 52,000
Loss on Default 122,000

Materials Inventory 18,000

Accounts Payable 18,000

Goods in Process Inventory 69,600

Applied Factory Overhead 69,600

Factory Overhead Control 30,000

Operating Expenses 20,000
Accumulated Depreciation – Building 50,000

Discount on Notes Payable 12,000

Equipment 10,800
Operating Expenses 1,200

Retained Earnings 36,000

Other Assets 36,000

Interest Receivable 16,200

Other Income 16,200

Interest Expense 67,500

Operating Expenses 67,500

Interest Expense 22,500

Chapter 9 – Shareholders’ Equity

Interest Payable 22,500

Share Capital 80,000

Retained Earnings 80,000

Share Capital 250,000

Share Premium 250,000

Retained Earnings 348,000

Dividends Payable 348,000

Operating Expenses 115,000

Accrued Operating Expenses 115,000

Applied Factory Overhead 747,600

Overapplied Factory Overhead 11,600
Factory Overhead Control 736,000

Overapplied Factory Overhead 11,600

Cost of Goods Sold 11,600

Income Statement Correct Balances:

Sales P2,800,000
Cost of goods sold 1,948,400
Gross profit P 851,600
Realized gross profit on installment sales 108,500
Total gross profit P 960,100
Loss from Repossession ( 8,000)
Gross profit, net of loss on repossession P 952,100
Operating Expenses ( 609,500)
Other Income 71,600
Unrealized Gains on Trading Securities 12,800
Other Expenses and Losses ( 36,500)
Income before interest and taxes P 390,500
Interest expense 158,000
Income before income tax P 232,500
Income tax expense 69,750
Net income P 162,750

Balance sheet accounts

Current Assets
Cash P1,015,900
Trading Securities 214,800
Installment Accounts Receivable 340,000
Interest Receivable 16,200
Dividend receivable 2,000
Receivable from officers 45,000
Chapter 9 – Shareholders’ Equity

Inventories 486,500
Prepaid expenses 40,000
Total current assets P2,160,400
Non-current Assets
Property, Plant and Equipment, at cost P5,409,200
Accumulated Depreciation 186,000
Net carrying value P5,223,200
Other Financial Assets 485,000
Total Non-current assets 5,708,200
Total Assets P7,868,600

Current Liabilities
Accounts payable P 508,000
Salaries payable 12,000
Notes payable 538,000
Accrued expenses 115,000
Dividends payable 348,000
Interest payable 22,500
Deferred gross profit 119,000
Income tax payable 69,750
Total current liabilities P1,732,250
Non-current liabilities
Notes payable 1,000,000
Total liabilities P2,732,250

Shareholders’ Equity
Share Capital P2,900,000
Share Premium 1,450,000
Retained Earnings 692,350 5,042,350
Total Liabilities and Shareholders’ Equity P7,774,600